IMF Concludes Article IV Consultation With Libya

by Lorys Charalambous, Tax-News.com, Cyprus

28 September 2009

On September 21, the International Monetary Fund released details of its Article IV consultation with Libya, concluded on August 5, 2009, which calls for lower rates of corporate tax and customs duties.

Libya’s overall macroeconomic performance in 2008 was strong, with real GDP growing by about 3.8%. However, non-oil growth was broad-based and estimated at 8%. Oil output increased slightly at the first three quarters of the year then declined in the last quarter in line with OPEC’s decision to reduce quotas. As a result, production for the year as a whole was similar to its 2007 level. Inflation rose in 2008 to about 10% due to higher international commodity prices and a marked increase in public expenditure.

The fiscal surplus remained at about 25% of GDP in 2008. Revenue increased by about 37% due to higher oil prices and enhanced tax and customs administration. At the same time, overall expenditure rose by an estimated 45%, reflecting large increases in both current and capital outlays. Spending under the Wealth Distribution Program (WDP) was limited to LYD3.3bn (USD2.7bn) (equivalent to about 3% of GDP), compared to LYD4.6bn (USD3.8bn) approved in the budget

The 2009 budget envisages a small nominal decline in public expenditure, putting an end to three years of large fiscal expansion. The small decline in overall expenditure reflects a 20% reduction in capital spending and a 25% increase in current outlays, which includes a 16% projected increase in the wage bill. The latter is due in large part to the return to the civil service payroll of a portion of the public employees that were previously transferred to a central labor office for retrenchment to the private sector. The overall fiscal position is expected to register a surplus of about 10% of GDP in 2009 despite the projected decline in oil revenue by almost 40%.

According to the IMF, bank restructuring and privatization are making progress. An asset management company to deal with bad loans has been established, capital requirements are being raised, and smaller banks are being encouraged to seek well-established foreign strategic partners. The CBL licensed two new banks with foreign participation. In addition, the authorities privatized 15% of one of the remaining two large public banks by issuing an IPO.

The IMF observed that progress has been made in customs and tax administration. Large taxpayers offices have been established and customs inspection is being automated. However the IMF noted that the “service fee” on imports has recently been increased from 4% to 10%, and other ear-marked fees remain in place.

The Executive Board in its recommendations underscored the importance of further efforts to address excess liquidity, improve public financial management, and advance structural reforms that would support the authorities’ aim to diversify the economy away from oil and promote the role of the private sector.

The IMF welcomed the authorities’ overall fiscal stance, noting that it strikes an appropriate balance between short- and long-term considerations, and commending the small decline in public expenditure planned for 2009 as a clear break from large increases in recent years. The Board encouraged stronger efforts to improve the quality and composition of expenditure, and limit the growth of current expenditure. Directors welcomed the authorities’ decision to postpone the implementation of the Wealth Distribution Program.

The board considers it crucial to advance the efforts to strengthen public financial management, The recent merging of the ministries of finance and planning is an important step in this direction, it observed. The IMF endorsed the government’s intention to establish a Treasury Single Account to enhance cash management and expenditure control and to improve coordination of fiscal and monetary policies. Going forward, modernizing the budget’s legal and administrative framework to reduce extra-budgetary funds would enhance budget transparency and effectiveness, the Fund recommended.

Directors recognized the considerable progress achieved in liberalizing and opening the economy, supported by Fund technical assistance. They encouraged continued efforts to enhance the regulatory framework in order to further improve the business climate and promote private sector activity. The welcome strengthening in customs and tax administration, the IMF believes, needs to be accompanied by low corporate tax and customs rates, with few brackets and limited exemptions.

Directors encouraged the authorities to continue to improve economic and financial statistics.

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